Emerson Electri Q4 2010 Earnings Call Transcript

Emerson Electri (EMR)

Q4 2010 Earnings Call

November 02, 2010 2:00 pm ET

Executives

Lynne Maxeiner - Director of IR

Frank Dellaquila - Chief Financial Officer and Senior Vice President

David Farr - Chairman of the Board, Chief Executive Officer and Chairman of Executive Committee

Analysts

Richard Kwas - Wells Fargo Securities, LLC

Scott Davis - Morgan Stanley

Shannon O'Callaghan - Lehman Brothers

Terry Darling - Goldman Sachs Group Inc.

Steven Winoker - Bernstein Research

C. Stephen Tusa - JP Morgan Chase & Co

Robert Cornell - Barclays Capital

Jeffrey Sprague - Citigroup

Julian Mitchell

Nigel Coe - Deutsche Bank AG

Deane Dray - Citigroup Inc

Presentation

Operator

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Good day, ladies and gentlemen, thank you for standing by. Welcome to the Emerson's Fourth Quarter Fiscal 2010 Results Conference Call. [Operator Instructions] Emerson's commentary and responses to your questions may contain forward-looking statements, including the company's outlook for the remainder of the year. Information on factors that could cause actual results to vary materially from those discussed today is available at Emerson's most recent annual report on Form 10-K, as filed with the SEC. I would now turn to your host, Lynne Maxeiner Director of investor relations. Please go ahead.

Lynne Maxeiner

Thank you. I am joined today by David Farr, Chairman and Chief Executive Officer of Emerson; and Frank Dellaquila, Senior Vice President and Chief Financial Officer. Today's call, we'll summarize Emerson's fourth quarter 2010 results. A conference call slide presentation will accompany my comments, and is available in the Investor Relations section of Emerson's corporate website at emerson.com. A replay of this conference call and slide presentation will be available on the website after the call for the next three months. I will start with the highlights of the quarter as shown on Page 2 of the conference call slide presentation.

Fourth quarter sales were up 14% to $5.8 billion with increases in all five segments. Underlying sales growth of 12% in the quarter with all geographic regions resuming growth. Gross profit margin of 39.9%, which was up 100 basis points from the prior year quarter. Strong operating profit margin of 17.4%. Earnings per share of $0.98, up 46% compared to $0.67 in the prior year quarter. This includes the positive impact of $0.23 from divested businesses. Operating cash flow was $1.27 billion and free cash flow was $1.046 billion. Our balance sheet remains strong and operational efficiency initiatives continue. Our trade working capital as a percent of sales improved to 15.5% from 16.6% in the prior year quarter. Actions taken over the past two years are paying off and we are well-positioned for accelerated growth globally.

Slide 3 of the P&L. Again, sales up 14% to $5.841 billion. Underlying sales were up 12%, acquisition's added three points and currency subtracted a point. Operating profit of $1.019 billion, up 14%. The increase driven by cost reduction benefits and volume leverage. Earnings from continuing operations up 14% to $572 million. Diluted average shares of $757.4 million with 0.6 million shares repurchased for $28 million in the quarter, which leaves you with an EPS from continuing ops of $0.75, up 12%. This includes a $0.04 negative impact from the Chloride acquisition and $0.02 negative impact from motors being reclassified to discontinued operations. $0.23 from the impact from Motors and LANDesk gives you the EPS of $0.98.

Slide 4, this is a summary table we had in our press release today that provides additional detail of the impacts from the Chloride acquisition and Motors and LANDesk divestitures. The next slide, Slide 5, underlying sales by geography. In the fourth quarter, the U.S. was up 9%, total international was up 13%, with Europe up 15%, Asia up 14%, Latin America up 11%, Canada up 21%, and Middle East/Africa up 2%. Again, total underlying sales up 12%, currency subtracting one point and acquisitions adding three points, bringing you to the consolidated sales of 14%. For fiscal 2010, the U.S. was up 1% and Europe declined 7%. Asia was up 7%; Latin America down 2%; Canada, down 9%; Middle East, Africa, down 10%. Total international declined 2% for the year.

Total underlying sales were down 1% for the year, currency added two points and acquisitions added four points, giving you to consolidated sales of 5% for the year. Emerging markets now represents 34% of total sales in 2010.

Slide 6, some income statement detail. Gross profit dollars of $2.331 billion or 39.9% of sales, up 100 basis points from the prior year quarter. The improvement coming from aggressive cost reduction programs, volume leverage, restructuring benefits and acquisitions. SG&A of 22.5% of sales gets you to operating profit of $1.019 billion or 17.4% of sales. Other deductions net of $116 million, which includes lower restructuring of $78 million and higher amortization of $22 million and deal costs of $14 million, gets you to a pretax line of $838 million or 14.3% of sales. Taxes in the fourth quarter of $254 million for a tax rate of 30.2%.

Next slide, the cash flow and balance sheet. Operating cash flow of $1.27 billion, down 6% versus the strong Q4 in 2009. Our working capital is still positive cash. Capital expenditures of $224 million gets you to a free cash flow of $1.046 billion. Free cash flow conversion in Q4 was 140%. Trade working capital balances at the bottom of the slide showed a solid improvement in trade working capital to sales ratio, improving to 15.5% of sales from the quarter.

Slide 8, the Business segment P&L. Business segment EBIT of $1.056 billion or 17.6% of sales, up 31% or 230 basis points, with benefits from volume leverage, cost containment programs and lower restructuring costs. Difference in accounting methods of $53 million, corporate and other, up $91 million. We had a negative impact from the increase in stock price and overlap for retention purposes of two stock compensation programs of $50 million and Chloride one-time costs of about $30 million. We expect Chloride one-time charges to be at a similar level, $30 million, in the first quarter of fiscal 2011. Earnings from continuing ops before interest and taxes of $903 million. Interest expense of $65 million gets you to a pretax earnings of $838 million.

Next, we'll review individual business segments, starting with Process Management. Sales in the quarter up 5% to $1.701 billion. Underlying sales were up 5%, acquisitions added a point and currency subtracted a point. By region, U.S. was up 8%; Asia, down 3%; Europe was up 4%; and Middle East/Africa down 4%. Order rates are strong globally, up over 20% in the trailing three-month average.

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